Accounting Woes Pummel Stock Market
Growing worries over U.S. companies’ accounting practices triggered a sharp decline on Wall Street on Tuesday.
The plunge of almost 248 points in the Dow Jones industrial average--the biggest one-day drop since October--pointed up a loss of faith by investors in both the credibility of company managements and in the checks and balances of the U.S. financial system that should be preventing fraud, analysts said.
Fearing another Enron-like stock collapse, many professional investors say they have spent the last several weeks scouring financial statements of companies they own for hints of impropriety.
Their fears bubbled over Tuesday amid new disclosures of accounting controversies at some companies and rumors of potential troubles at others.
“People are petrified,” said Robert Willens, an accounting expert at brokerage firm Lehman Bros. in New York. “This is a major, major crisis in confidence.”
The Dow tumbled 247.51 points, or 2.5%, to 9,618.24, its biggest one-day loss since Oct. 29.
The broader Standard & Poor’s 500 index sank 2.9%, its largest loss since it fell 3.1% on Sept. 20 in the market sell-off that followed the Sept. 11 terrorist attacks.
In a sign of just how preoccupied investors are by accounting issues, the market appeared to ignore the day’s upbeat economic news: Consumer confidence continued its recent steady rise, orders for durable goods improved and the Treasury Department said the economy is likely to grow this quarter.
Instead, investors focused on the disclosure of potential problems at several large companies:
* Energy trader Williams Cos. plummeted 22% after announcing that it would delay its fourth-quarter earnings report while it reviews its financial ties to a telecommunications spinoff. The news sparked concern that the company could face the kind of meltdown that pushed Enron Corp. into bankruptcy protection in December.
* Shares of Tyco International Ltd. slid 20% after the company revealed that it had paid one of its board members $20 million for help in arranging a merger. Interlocking relationships between companies and their directors have received heavy scrutiny amid criticism that Enron’s board was handcuffed by various conflicts of interest.
* Cendant Corp. shares dropped 10% on rumors about a potentially negative newspaper article about its accounting.
* PNC Financial Services Group, a Pittsburgh-based banking company, saw its stock slump 9% after the firm revised its 2001 profit lower after the Federal Reserve questioned the company’s accounting.
“The magnitude of the Enron situation took so many people by surprise and has had such far-reaching implications that people are looking at any company whose accounting is not totally understandable,” said Sally Anderson, a money manager at Kopp Investment Advisors in Minneapolis.
The scrutiny marks a sharp reversal from the attitude that prevailed throughout the 1990s bull market, Anderson said. In that period, investors often lauded companies for “managing” their earnings--Wall Street’s euphemism for the ability to tweak financial figures to satisfy quarterly profit expectations.
“Now that whole issue has taken on a nasty taint,” Anderson said.
Some analysts believe that any company whose earnings of recent years can be questioned will take steps in coming weeks to be upfront about their numbers and accounting procedures. In some cases, companies may voluntarily reveal accounting irregularities before an outside investor does so, some experts said.
“It’s a mea culpa [environment],” said Robert Olstein, who manages the Olstein Financial Alert fund and is a longtime critic of corporate accounting practices. “Everybody is going to come out now and admit their earnings were a little aggressive, [saying] ‘maybe we didn’t earn as much as we said we did in the last five years.’”
But if doubts about corporate accounting mushroom, they could become a major weight on the market, some analysts warn. The basic issue is whether investors can trust corporate managers.
“The real issue is a lack of trust in the management of large U.S. corporations. Whatever management says, people just don’t buy it anymore,” said Steve Colton, manager of the Phoenix-Oakhurst Growth & Income Fund.
“We own Tyco, and I think it’s a tremendously cheap stock if these earnings estimates are to be believed,” he said. “But the attitude among investors seems to be: ‘If the company is so cheap, why don’t you just take it private?’”
In the wake of Enron, some other big-name Chapter 11 bankruptcy filings--ranging from low-tech Kmart Corp. to high-tech Global Crossing Ltd.--also are rattling investors’ nerves, he said.
And with once-acquisitive companies such as Williams taking huge write-offs against past earnings, it raises doubts about the strategic mergers and other ambitious plans many managements have undertaken in recent years, analysts say. For example, drug giant Merck & Co.’s plan to spin off its Medco pharmacy business, a move announced Tuesday, calls into question the success of that 1993 acquisition, Colton said.
“Short sellers” may have contributed to Tuesday’s sell-off, Colton said. He said some short sellers--who borrow stock and sell it, betting on a price decline--were spreading rumors that telecom giant WorldCom Group Inc. faces a debt-rating downgrade.
Compounding the market’s troubles is that the post-attacks rally lifted prices so far so fast, with the S&P; gaining about 20% and the Nasdaq composite index surging about 40% in 2 1/2 months. That left many stocks selling for steep valuations relative to earnings, and many investors wary about what upside might be left.
